Before you sign on the dotted line for the car loan your bank offers, compare your options from a range of brands. There are some incredibly cheap car loans out there, and the key to finding the right one is picking the loan type to suit your financial needs.
Find out what you need to know to compare car loans and pick the right option for you.
Car loans can work differently depending on what type of loan you take out and what kind of car you’re looking to purchase.
Typically, the following steps apply:
You apply for finance. Once you choose the right car finance for you, you need to apply. Unsecured loans only require your personal and financial details, but secured loans also need information about the car.
The lender approves your loan. Car finance approval can happen on the same day, or they may take up to ten days. You may also receive conditional approval, where the lender tells you how much you are likely to be eligible for, so you can go car shopping knowing your spending limitations.
The car is purchased using the funds. Buying a car can happen a few different ways. If you’re buying the car in a private sale, your lender may pay the seller directly or give you a cheque to pay yourself. If you’re purchasing from a dealership, the lender usually pays them directly. Unsecured loans require you to arrange the payment yourself.
The types of car loans available
There is a wide variety of vehicle finance options out there, and there are features that differentiate these.
Secured car loan. With a secured car loan, the loan provider uses the vehicle you buy as security for the loan. The lender has the right to repossess the car if you default on your loan. As this type of loan is less of a risk to the lender, the rates for secured loans are usually lower.
Unsecured car loan. With unsecured car loans, the lender doesn’t use an asset as security for the loan, which means they have no asset to repossess if you stop making your loan repayments. These loans come with a higher interest rate, but you have more flexibility with the way you use the loan.
Chattel mortgage. If you’re self-employed and purchasing a car primarily for business use, you can consider a chattel mortgage. The lender you apply with takes out a “mortgage” over the car while you make monthly payments towards the vehicle. Once you pay it in full, the lender removes the mortgage, and you own the vehicle outright.
Car hire purchase. Self-employed borrowers also have the option to finance a car using a car hire purchase. Every repayment made towards a car hire purchase agreement reduces the balance owing to the price of the vehicle. If you’re a self-employed borrower, it’s essential you discuss the different car finance options with an accountant before making a decision.
Novated Lease. A novated lease is an option for an employee if they can arrange it with their employer. Primarily, the lender purchases the car, and your employer makes the lease payments on the vehicle out of your before-tax salary, which can potentially help reduce your taxable income, and results in you paying less tax overall. At the end of the novated lease term, you have the option to purchase the vehicle outright for an agreed sum, or return it and upgrade to a different car where you enter into a new lease agreement.
Car lease. For the self-employed, you can also use a car lease to buy a car for business purposes. The lender purchases the vehicle, and you make regular lease payments until the end of the agreement. A commercial car lease may give you the option to buy the car at the end of the lease term at a reduced price, or you can choose to give the car back and enter into a new lease agreement for a different vehicle.
You can compare car loans by looking at the following
Before you apply for any loan, it’s always a good idea to check as many details as you can about the offer. Here are some things you need to look for before you proceed.
The interest rate. The interest rate charged on your car finance plays a part in how much your repayments are. Always know what rate the lender is offering and take the time to compare car loans from other lenders to be sure the offer is competitive.
The loan term. Car loans are set over terms as short as one year or for as long as seven years. Some lenders, usually dealership finance providers, give you a set-loan term which comes with a balloon payment at the end. Check if your repayments pay off your loan or if you need to cover more at the end of the term.
How your repayments work. Ask how often you need to make repayments, how you make them and check if you can make extra payments or repay your loan early without penalty.
What fees does the lender charge? Some lenders charge a monthly account fee or administration fee on car loans, which may range from $5 per month to $15 per month, depending on the type of car finance you’re applying for. Lenders also charge an establishment fee, usually between $100 and $600.
Does the lender require insurance? As the lender uses your car as security for your loan, they may insist that the vehicle is adequately insured at all times until you fully repay the loan.
Tips for better car finance
Learn about:
Making sure you get the cheapest car loan
How to get a lower rate
Ways you can reduce your repayments
When the cheapest interest rate isn’t the cheapest car loan
When most people go hunting for the most affordable car loan, they immediately look for a low-interest-rate car loan and believe they’re getting a great deal. Unfortunately, it is possible for the car finance with the cheapest rate to end up costing you more over the term of the loan if you’re not careful.
How the cheapest rate could cost you more:
Consider a car that costs $25,000. One lender is offering a rate of 8% p.a. over five years, and another is offering a rate of 9% p.a. The only difference is the fees. Take a look at how much it could cost you if you opt for the cheapest rate:
Lender A
Lender B
Loan amount
$25,000
$25,000
Interest rate
8% p.a.
9% p.a.
Loan term
5 years
5 years
Monthly account fee
$20
$0
Establishment fee
$0
$200
Total monthly cost
$532.91
$518.96
Total repayment amount
$32,275
$31,588
In the above example, the interest rate that is higher turns out to be the cheaper option, despite the initial up-front cost.
Make sure you consider all costs before you apply for a car loan and use a comparison rate calculator to determine your repayments.
How to get a lower interest rate
Be aware of interest rates in the market Take the time to compare interest rates from a range of lenders, as it gives you plenty of ammunition when it comes to negotiating.
See if you can negotiate a price with the seller If you’re keen to stay with your bank or credit union for your car finance needs, take your interest rate information with you when you make enquiries, which encourages the lending officer to see if there is any room to take a few extra points off the interest rate they offer.
Take out car dealership finance When you apply for a loan through the finance officer at a car dealership, you have plenty of room to negotiate on rates because the dealership often receives their loans at discounted rates, leaving them room to bump up the price you pay. The margin between what they pay to the lender and you pay to them forms their “trail” commission. In other words, every time you make a payment, some of it goes towards paying interest to the lender and some goes to paying commission to the car dealership. Haggle and negotiate on the rates the dealership offers. They usually have about 2% they can drop from the initial rate they may have quoted.
Can you get a package deal? Some banks offer a discount on its advertised interest rate if you have other banking products with them. If you already have a mortgage, a credit card and a transaction account with one bank, ask if they will give you a discount on your car finance if you add it to your package.
Ways you can reduce your monthly repayments
It is possible to reduce the payments you make on your car finance each month. The key is to ensure that you’re not paying more than you really should over the entire term of the loan. Here are some ways you can reduce your minimum monthly payments.
Borrow less It might sound obvious, but it’s true. If you can borrow even a little bit less on your loan amount, you end up paying less in monthly repayments. Borrowing $5,000 over a five-year loan term adds up to $1,000 per year extra you have to pay back, plus the interest charged on the amount, which adds up to approximately $90 per month out of your pocket.
Consider a residual balloon payment When you apply for car finance that has a residual balloon payment at the end of the term, you can drastically reduce your monthly repayments. For example, if you borrow $30,000 and you leave a $10,000 residual balloon payment to pay at the end of the term, the lender calculates your repayments based on the $20,000 you repay over five years, plus interest on the entire $30,000. Bear in mind; you need to cover this cost at the end of the term or refinance it with the lender.
Opt for a longer loan term If you choose a longer loan term, it reduces the amount you pay each month. Unfortunately, the lender also gets to charge you interest on your debt for an extended period, so you may end up paying far more in interest over the loan term.
How to apply for a car loan
Learn about:
What you need to apply
Car loan eligibility
The car loan approval process in New Zealand
What you need to apply
Below is a checklist of some of the information and documentation you may need to supply for your car loan application.
Identification
Driver’s licence OR
Passport OR
Birth certificate OR
18+ Card
Income and employment
Three recent payslips
Two years of tax returns (if self-employed)
Your after-tax income
Employment information and contact details
Assets and liabilities
Details of properties or substantial assets (such as a car) you own
Your ongoing expenses
Credit card or store card limits
Details of loans or overdrafts
Vehicle details
Vehicle make, model, year and colour
Vehicle identification number (VIN) or chassis number
Engine number
Registration number
Purchase price
The car loan approval process in New Zealand
Getting car loan approval might seem quick, but there are several stages your application needs to progress through before the lender releases money to the car’s seller.
Step one. To start the approval process, you need to fill out and sign an application form, which you can do in person at the bank branch or car dealership. Alternatively, you can fill it out using the lender’s online application form on its website.
Step two. Once the loan provider receives your application, a credit officer reviews it. If everything is in order, you should obtain conditional approval almost immediately.
Step three. The final approval stage is when the lender may request other documentation to support your application, which includes your identification; payslips or income verification; bank statements and any additional pertinent information.
Step four. Once you receive your final approval, the lender asks you to sign the loan documentation, which is your agreement with the bank to repay the amount you’re borrowing over a specified loan term at an agreed interest rate.
Step five.The lender funds the loan, which can happen in a few ways. If the loan is secured, the lender usually pays it directly to the person/dealer you’re buying the car from, or the funds are given to you as a cheque. If it’s unsecured, you usually receive the funds directly and are responsible for purchasing the car.
If you still haven’t found the information you’re looking for, we’re confident you’ll discover it below.
Yes, if you meet the eligibility requirements. As long as you are over 18, a citizen or permanent resident of New Zealand and can verify that you earn a steady income, you may qualify.
The amount you can borrow is determined by your income and current liabilities. There may also be minimum car loan amounts set by individual lenders. Lenders usually offer between $5,000 and $65,000 if the loan is secured. With some lenders, this may be more.
Yes. Pre-approval is a great way to work out how much you can comfortably borrow and what your repayments are before you head out car shopping.
The approval process for car loans is usually rapid. In most cases, you should get a conditional approval in a couple of hours, but it may take longer depending on the lender.
Some lenders allow you to include your car insurance premium and other costs associated with the purchase in your loan amount. Always ask to make sure this applies to your loan type.
Some lenders place restrictions on a vehicle’s age and some even on the car make and model. If you’re in doubt about the car you want to buy, take the time to ask your lender some questions about whether it is suitable for them to use as security for the loan.
Some lenders allow you to borrow the entire purchase price of your car, but this depends heavily on the strength of your financial situation and credit history.
Your repayments can be made automatically via direct debit on a weekly, fortnightly or monthly basis with most lenders. A specific amount is debited from your regular transaction account each month to cover your payment.
This depends entirely on the lender you choose and the type of car loan you want. Some loans charge you an early repayment fee if you make extra repayments while others won’t. It’s always a good idea to check whether this fee applies to your loan before you proceed with the application.
Interest is calculated on your outstanding loan balance on a daily basis, and the loan provider charges it to your account monthly in arrears.
You can buy a car through a private seller if you wish. You need to provide details about the vehicle to the lender, such as registration number and vehicle identification number (VIN) for the loan to proceed.
The enquiries you make for any form of credit are entered onto your credit report as an enquiry with that lender. If the provider declines your application and you submit another application elsewhere, your report shows two enquiries.
Many banks may decline a car loan application from a borrower with a bad credit history. However, some lenders are willing to let you borrow money even with bad credit. You may want to discuss your application with a car finance specialist before you proceed, as this will help you locate the appropriate lenders to help with your situation and improve your chances of receiving approval. The lender usually secures these loans against the car in case of default.
A balloon payment is a residual amount of money that you need to repay at the end of the loan term. This type of loan lets you reduce your monthly repayments throughout the term of the loan; then you pay off the lump sum still owing at the end. You might choose to sell the car to pay off the lump sum amount due or trade it in on another vehicle and refinance the residual amount into a new loan.
If you stop making the car loan repayments, the lender may choose to repossess your car. They sell it in an attempt to recoup some of their money, along with covering any repossession fees. If the sale price of the car doesn’t fully cover those costs or pay off your outstanding loan amount entirely, you may still need to repay the outstanding balance to the bank.
Yes, you are. The Credit Contracts and Consumer Finance Act (CCCFA) gives you the right to cancel a contract within five working days of signing the contract unless you have taken delivery of the car within this time.
Remember that a car loan can be a significant financial commitment, so exercise diligence and compare a wide range of options before applying.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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